SunTrust offers structured CDs; wrapper still attractive amid volatility, credit concerns, adviser says

By Kenneth Lim

Boston, Jan. 12 - Structured certificates of deposit are seeing ongoing healthy demand at the start of the new year as investors continue to put a premium on the value of principal protection, an investment adviser said.

SunTrust Bank launched three structured CDs this past week linked to currencies and equities.

The bank plans to price zero-coupon CDs due July 22, 2011 linked to the absolute return of the dollar/euro exchange rate.

At maturity, if the dollar/euro exchange rate closed below 80% of its initial level or above 120% of its initial level during the life of the CDs, investors will receive par plus 1.5%. Otherwise investors will receive par plus the absolute value of the exchange rate return.

The CDs may be put quarterly.

SunTrust is also offering zero-coupon CDs due Jan. 17, 2014 linked to an equally weighted basket of the S&P 500, Dow Jones Euro Stoxx 50 and Nikkei 225 indexes.

The payout at maturity will be par plus any basket gain, capped at a total payout of between 140% and 145% of the principal. Investors will receive at least par.

The CDs are non-callable.

A third series of CDs by SunTrust is due Feb. 1, 2013 and linked to the S&P 500.

Payout at maturity will be par plus the sum of the index returns for each year during the life of the notes, up to a maximum return of 8% to 10% per year. The exact amount will be set at pricing.

The CDs will pay a minimum interest amount of 3% at maturity.

The S&P 500-linked CDs may be put quarterly.

CDs still in demand

Structured CDs continue to be interesting for investors at the start of 2009, an investment adviser said.

"That's still the bulk of what I'm looking at," the adviser said. "If I can get the strategy that I'm looking for as a CD and the terms are acceptable, I'll get the CD."

The strength of the principal protection continues to be the main draw, the adviser said.

"The FDIC insurance is the most valuable aspect of the CD," the adviser said. "Because it's FDIC insured, you don't have to worry about the creditworthiness of the issuer, and there are a number of banks where the market continues to show some concern about the health of those banks. It gives you principal protection like a principal-protected note, which is good in a volatile market, but it's safer than a principal-protected note because of that FDIC insurance.

" The increase in the FDIC limit to $250,000 from $100,000 was also quite a significant factor. It more than doubles that amount of assets that you can allocate to this particular type of investment."

FDIC limits, issuers limit growth

The segment of the market that comprises structured CDs is not growing as fast as it could be, the adviser noted.

"One of the limits is the insurance only covers up to $250,000 per depositor per bank, so that's a natural limit in terms of how much investors can have in CDs," the adviser said.

"The other thing is I haven't seen that many banks really offer interesting CDs. So it's really a combination of those two factors. If there are only four banks that are offering CDs, each investor can only put up to $1 million in CDs in theory. In practice it's going to be less than that because an investor usually also has deposits like savings accounts that use up some of that limit. The rest of the investor's portfolio has to be in something else."

Investors could also drift back toward structured notes if the market begins to recover.

"The structured notes will start to look more attractive again when two things happen," the adviser said. "One is when the market stops being overly concerned about the creditworthiness of the banks. Because then the cost of that FDIC insurance becomes too much. The second thing is when volatility goes down and the market starts to recover, which means investors aren't as obsessed about principal protection. Principal protection costs the investor, so when you don't need it anymore it's better not to have it.

"Right now, already, some people think the market could be near a bottom, so if that's the case maybe principal protection may stop being as attractive for those people."

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